Presentation:
Federal Income Taxation
Chapter 2 Income In Kind?
Professors Wells
August 25, 2015
WHAT IS INCOME?
p.554
How is the concept of “income” defined?
Consider the Haig-Simons definition: Y = C + ΔW
“Accession to wealth” consisting of
1) Consumption (during the measurement period), and
2) Increase (if any) of value of property rights (during the
measurement period).
2 What is Income? Code Structure &
Tax Base Definition
Code §1 – the tax imposing provision (for individuals) & Code
§11 (for corporations).
§61 - statutory definition of “gross income”
§61(a)(1)
§61(a)(2)
§61(a)(3)
§61(a)(4)
compensation
business income
property gains
interest, etc.
§63(a) – defining taxable income
3 NONCASH BENEFITS
p.42
Treas. Reg. §1.61-1(a): “gross income includes income in any
form, whether in money, property or services”
Treas. Reg. §1.61-2(d)(1): “if services are paid for in property, the
fair market value of the property taken in payments must be
included in income as compensation”
Example: Atticus Finch paid legal fees with by Walter
Cunningham in hickory nuts. (p. 47)
Example: Client “repays” lawyer for drafting a will by
painting the lawyer’s house. (p. 50)
4 Old Colony Trust Co.
Discharge of an Obligation
Discuss Facts
1918
Where was the tax gross-up paid?
p.39
IRS
What was holding
Old
Colony
Discuss pyramid problem
$978,725 salary
Executive
IRS Assesses Executive $854,782
Tax Gross-Up
Add’l Tax
Add’l Penalties
Total Tax
1918
681,169
474,077 (70%)
380,705
1,535,951
5 Alice Examples
(Economic Neutrality Thesis)
Base Case: Alice is paid $5,000 per month. Alice pays rent and living expenses.
Variation #1: Alice paid $4,000 per month. Unitek pays $1,000 to Alice’s landlord.
Variation #2: Alice is paid $1,500 per month. Unitek pays $1,000 per month to Alice’s
landlord and pays $2,500 to shops/restaurants/grocery stores as Alice directs.
Horizontal Equity Question: Is Alice more like the Base Case or more like the
person who earns only $4,000 (Variation #1) or the person who only earns $1,500
(Variation #2)?
6 Alice Examples
(Economic Neutrality Thesis)
Base Case: Alice is paid $5,000 per month. Alice pays rent and living expenses.
Variation #1: Alice paid $4,000 per month. Unitek pays $1,000 to Alice’s landlord.
Variation #2: Alice is paid $1,500 per month. Unitek pays $1,000 per month to Alice’s
landlord and pays $2,500 to shops/restaurants/grocery stores as Alice directs.
Horizontal Equity Question: Is Alice more like the Base Case or more like the
person who earns only $4,000 (Variation #1) or the person who only earns $1,500
(Variation #2)?
7 Meals & Lodging Provided By Employer
Benaglia v. Commissioner
p.44
Facts: Hotel manager receives cost meals and lodging at no cost.
8 Royal Hawaiian Hotel: A Starwood Five Star Hotel
9 Lodging in the King Kamehameha Suite
www.royal-hawaiian.com
10 Lodging in the King Kamehameha Suite
www.royal-hawaiian.com
11 Lodging in the King Kamehameha Suite
www.royal-hawaiian.com
12 Dining at the Jewell-Toned Azur Restaurant
www.royal-hawaiian.com
13 Work-related Fringe Benefits
Should consumption items provided by the employer be
excluded from gross income when motivated by “the
convenience of the employer”, e.g., meals onsite to keep the
employee on location for the lunch period?
Consider horizontal equity issues if employers furnish many “inkind” benefits to some employees.
Are working conditions not consumption substitutes? Enable
partial exclusion only?
14 Turner v. Commissioner
p.48
Discuss Facts
1.  Retail first-class ticket price: $2,220
2.  Exchange first-class ticket plus $12.50 for 4 round trip tourist
tickets to Rio de Janiero.
What amount in income?
Court Holding: $1,400
15 Notes to Turner
p.50
1.  Does this case provide a viable solution for the valuation problem in
Benaglia?
2.  Suppose Benaglia could show that living in a hotel was for him no
boon but a burden. Would that justify excluding or assigning a low
value to the lodging provided him?
3.  Suppose it could be shown that Benaglia had a passion for hotels and
that living in a hotel was worth much more to him (“consumer
surplus”) than the price of a room. Would it then be justifiable to tax
Benaglia on more than the established room rent?
4.  Is difficulty of valuation a reason for omitting a noncash benefit from
income entirely? Conversely, is ease of valuation a reason for
taxation?
5.  Does the fact that an item is supplied for the convenience of an
employer, or other payor, bear significantly on the question of
valuation or any other relevant question?
16 6.  Does identity of payor impact the analysis?
Non-Employer Benefits; Gross Income Inclusion?
Haverly
p.51
Free textbook samples - Gross income? When samples
received?
Why treat as income samples received only when deduction
claimed for income tax?
Necessity for “symmetry” in the tax system?
Correct approach utilized here? Why not include in gross
income when the books were received? A valuation dilemma?
Other possible argument?
17 §119
p.53
Requirements for §119 gross income exclusion eligibility:
1) Meal issue
2) Furnished issue
3) “Convenience of the employer” issue
4) “On the business premises”
How negotiate the manager’s employment contract (considering
§119)?
18 §119
Problems
p.54
1. Anderson was a motel manager who lived in the motel until his family outgrew their
quarters. The motel had a high occupancy rate, and so instead of giving him more space
in the motel, the owner purchased a house in a tract two short blocks from the motel
and required him to live there.
2. Dole was hired as assistant superintendent of Packard Mills, and he was told he
would be on call 24 hours a day and that he would have to live in a company-owned
house approximately one mile from the mill so that he would be readily available for
emergencies and conferences. Other supervisory personnel were also required to live in
company houses at the same location. The company houses were nearer to the mill than
any other available housing, and Packard’s supervisory personnel were frequently
called on outside regular hours.
3. A Veteran’s Administration doctor lives in a home on hospital grounds about a mile
from the hospital itself where he works. A so-called housing allowance is deducted
from his regular salary grade and would be deducted as long as government housing
were available, whether or not he occupied it.
4. Taxpayers, husband and wife, accept jobs as domestic cook and gardener for a
wealthy couple who provide them a room in their house and meals in their kitchen.
5.
Must a university president report as gross income the rental value of
an official residence located adjacent to campus that is furnished free of charge? 19 Commissioner v. Kowalski
p. 55
Kowalski case - meal cash allowance –
not furnished in kind and not fitting within the Code
provision (& legislative history).
Is, however, a “tax common law” exclusion available? No.
What are the “business premises” for purposes of state
troopers? Other taxpayers?
“Supper money” for law firm associates?
20 Sibla v. Commissioner
p. 65
Facts: Los Angeles fire fighters were required to participate in a
common mess at their fire station under rules imposed to
desegregate the department. The fire fighters purchased and
prepared the food themselves and were required to contribute to a
fund to cover the costs. Meal expenses averages $3 per person per
24-hour shift, and in 1973 Sibla deducted his total payments for the
year.
Issue: Is the firefighter’s contribution to the common mess either
deductible under §162(a) or excludible under §119?
Holding: Mess contributions are not subject to tax. Ninth Circuit
majority concludes (in alternative holdings) that the fire fighters’
meal costs were either deductible under §162(a) or excludible under
§119.
21 Code §119
Questions
p. 70
1. Compare the tax treatment of the following two employees.
A is paid $30,000 in stated wages, but $1,000 is withheld as payment for meals
furnished by the employer on business premises for the convenience of the
employer. §119(b)(3).
B is paid $29,000 in stated wages, and is furnished free meal worth $1,000 by
the employer on business premises for the convenience of the employer.
§119(a)(1).
2. Department employees work 24-hour duty shifts that begin at 8:00 a.m. and end at
8:00 a.m. the following day. During the duty shifts employees perform tasks such as
firefighting, inspecting buildings for fire hazards, and participating in training and
testing programs. Department employees are on duty at all times during the 24-hour
shifts. As required by a collective bargaining agreement, petitioner’s employer
provided certain cooking and eating facilities at #14 Fire Station such as a stove, two
refrigerators, and a table and chairs. During 1976 there were 12 persons working each
shift and, generally, meals were prepared as a common mess with one person
designated as the cook and two others as helpers on a rotation system. In addition,
employees were assessed 35 cents per day for a ‘‘house fund’’ which was used to defray
the cost of coffee, pots, appliances, and other cooking utensils. 22 Code §132(a)
Fringe Benefits
p. 72
No additional cost service. §132(b)
Qualified employee discount. §132(c)
Working condition fringe. §132(d)
De minimis fringe. §132(e)
Qualified transportation fringe. §132(f)
Qualified moving expense fringe. §132(g)
Qualified retirement planning services. §132(m)
Certain on-premises gyms and other athletic facilities. §132(j)(1)
23 Other Employer Provided Excluded Benefits p.72
1)
2)
3)
4)
5)
6)
7)
Moving expenses - §132(a)(6)
Dependent care - §129
Educational benefits - §127
Adoption assistance - §137 (subject to phase-out)
Group Term Life Insurance – §79
Medical Insurance payments - §105(b)
Cafeteria plans - §125
24 Questions
p.76
1.  Ford executive gets free car for both business and personal use.
a)  Is the personal use of the car income to employee?
b)  On audit, the revenue agent adds $6,000 to Derek’s gross income,
representing the value of the personal use of the Ford cars and asserts
that only the exclusions from gross income set forth in the Code and
regulations are allowable. Is this correct? See §61(a)(1).
c)  If some amount is includible in Derek’s gross income, How is it
determined?
2. Associate supper money. See §132(e)(1); §132(e)(2) & (f).
3. Employee Discounts
4. Employer provided cell phones and cell service so the employee can speak with
clients at times when the employee is away from the office, or if the employee’s
job demands that she speak with clients located in other time zones at times
outside of her normal work day. Employees are not prohibited from using
employer-provided phones for personal purposes. Is any amount taxable?
§132(d), (e); IRS Notice 2011-72, 2011-2 C.B. 407.
25 Treatment of Frequent Flyer Miles
Problem 6
p.77
Inclusion in gross income?
What if sale (or equivalent)?
What if miles attributable to business travel and miles not
credited to the employer?
Why is the IRS not acting administratively on this issue? See
Announcement 2002-18, 2002-1 C.B. 621.
26 Imputed Income
p.77
1.  Imputed Income from SelfProvided Services – imputed
income from a self-created
economic benefit?
2.  Imputed Income from the
Ownership of Consumer Assets –
homes, vehicles & consumer
durables? How value? Cost of
consumer assets would not be
deductible under a cash flow
consumption tax.
3. General Psychic Benefits – the
“happy life” as a gross income
item. Value of leisure?
27 Imputed Income
Rev. Rul. 79-24
p.80
(Supp. #27)
1.  In return for legal services, housepainter paints the lawyer’s
house.
2.  Landlord receives work of art from painter in return for rentfree use of an apartment for six months.
3.  Barter exchanges are required to be reported to the IRS. See
§6045(c)(1)(B)
28 Macroeconomic Effects: Deadweight Loss
Fringe Benefits
p.84
Economic Inefficiency of Tax Preference for Fringe Benefits
Initital
Eventual
Compensation
Cash
100.0 Compensation
Non-tax fringe
Cash
Non-tax fringe
100.0
100.0 60.4
-39.4 0
-39.4 0
60.4 100
60.4 60.4
Dead weight loss < $39.4
29